Full Press Release Details
QUEST DIAGNOSTICS REPORTS FOURTH QUARTER AND FULL YEAR 2018 FINANCIAL RESULTS; PROVIDES GUIDANCE FOR FULL YEAR 2019
SECAUCUS, N.J., February 14, 2019 - Quest Diagnostics Incorporated (NYSE: DGX), the world's leading provider of diagnostic information services, announced today financial results for the fourth quarter and full year ended December 31, 2018.
"In 2018 we grew revenues, adjusted earnings and cash from operations despite some challenges in the marketplace. Quest is well positioned once again in 2019 to deliver on our commitment to grow revenues and earnings, as our in-network status now extends to approximately 90% of commercially insured lives in the U.S.," said Steve Rusckowski, Chairman, CEO and President. "Our guidance for 2019 reflects significant reimbursement pressure offset by strong volume growth and continued execution of our Invigorate program. I am pleased to report our volumes for the year are off to a good start."
| Three Months Ended December 31, | Twelve Months Ended December 31, | ||||||||||||||||||||
| 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||||||
| (dollars in millions, except per share data) | |||||||||||||||||||||
| Reported: | |||||||||||||||||||||
| Net revenues (a) (c) | $ | 1,839 | $ | 1,865 | (1.4 | )% | $ | 7,531 | $ | 7,402 | 1.7 | % | |||||||||
| Diagnostic information services revenues (a) (c) | $ | 1,756 | $ | 1,785 | (1.5 | )% | $ | 7,204 | $ | 7,068 | 1.9 | % | |||||||||
| Revenue per requisition (c) | (5.5 | )% | (1.2 | )% | |||||||||||||||||
| Requisition volume | 3.4 | % | 2.5 | % | |||||||||||||||||
| Organic requisition volume | 1.1 | % | 0.5 | % | |||||||||||||||||
| Operating income (a) (b) (c) | $ | 220 | $ | 269 | (18.2 | )% | $ | 1,101 | $ | 1,165 | (5.5 | )% | |||||||||
| Operating income as a percentage of net revenues (a) (b) (c) | 12.0 | % | 14.4 | % | -240 bps | 14.6 | % | 15.7 | % | -110 bps | |||||||||||
| Net income attributable to Quest Diagnostics (b) (c) | $ | 127 | $ | 254 | (50.0 | )% | $ | 736 | $ | 772 | (4.7 | )% | |||||||||
| Diluted earnings per share (b) (c) | $ | 0.92 | $ | 1.82 | (49.5 | )% | $ | 5.29 | $ | 5.50 | (3.8 | )% | |||||||||
| Cash provided by operations | $ | 295 | $ | 323 | (8.2 | )% | $ | 1,200 | $ | 1,175 | 2.2 | % | |||||||||
| Capital expenditures | $ | 151 | $ | 82 | 82.7 | % | $ | 383 | $ | 252 | 51.7 | % | |||||||||
| Adjusted: | |||||||||||||||||||||
| Operating income (a) (c) | $ | 271 | $ | 317 | (14.6 | )% | $ | 1,225 | $ | 1,282 | (4.4 | )% | |||||||||
| Operating income as a percentage of net revenues (a) (c) | 14.7 | % | 17.0 | % | -230 bps | 16.3 | % | 17.3 | % | -100 bps | |||||||||||
| Net income attributable to Quest Diagnostics (c) | $ | 166 | $ | 179 | (7.3 | )% | $ | 798 | $ | 703 | 13.4 | % | |||||||||
| Diluted earnings per share excluding amortization (c) | $ | 1.36 | $ | 1.38 | (2.9 | )% | $ | 6.31 | $ | 5.40 | 16.7 | % |
patient responsibility as a reduction in net revenues; historically these amounts were classified as bad debt expense within selling, general and administrative expenses.
Guidance for Full Year 2019
The company estimates full year 2019 results as follows:
| Low | High | ||
| Net revenues | $7.60 billion | $7.75 billion | |
| Net revenue increase | 1% | 3% | |
| Reported diluted EPS | Greater than $5.16 | ||
| Adjusted diluted EPS excluding amortization expense | Greater than $6.40 | ||
| Cash provided by operations | Approximately $1.3 billion | ||
| Capital expenditures | $350 million | $400 million |
Note on Non-GAAP Financial Measures
As used in this press release the term "reported" refers to measures under the accounting principles generally accepted in the United States ("GAAP"). The term "adjusted" refers to non-GAAP measures as follows: (i) for the purpose of income measures the term "adjusted" refers to operating performance measures that exclude special items such as the effect of changes in tax law on our deferred tax assets (liabilities) and reserves, restructuring and integration charges, excess tax benefit ("ETB") associated with stock-based compensation and other items; and (ii) the term "adjusted diluted EPS excluding amortization expense" represents the company's diluted EPS before the impact of special items (described above) and amortization expense.
Non-GAAP adjusted measures are presented because management believes those measures are useful adjuncts to GAAP results. Non-GAAP adjusted measures should not be considered as an alternative to the corresponding measures determined under GAAP. Management may use these non-GAAP measures to evaluate our performance period over period and relative to competitors, to analyze the underlying trends in our business, to establish operational budgets and forecasts and for incentive compensation purposes. We believe that these non-GAAP measures are useful to investors and analysts to evaluate our performance period over period and relative to competitors, as well as to analyze the underlying trends in our business and to assess our performance. The additional tables attached below include reconciliations of adjusted measures to GAAP measures.
Conference Call Information
Quest Diagnostics will hold its quarterly conference call to discuss financial results beginning at 8:30 a.m. Eastern Time today. The conference call can be accessed by dialing 888-455-0391 within the U.S. and Canada, or 773-756-0467 internationally, using the passcode: "Investor." The company suggests participants dial in approximately 10 minutes before the call.
A replay of the call may be accessed online at www.QuestDiagnostics.com/investor or by phone at 866-424-7881 for domestic callers or 203-369-0869 for international callers; no passcode is required. Telephone replays will be available from approximately 10:30 a.m. Eastern Time on February 14, 2019 until midnight Eastern Time on February 28, 2019. Anyone listening to the call is encouraged to read the company's periodic reports, on file with the Securities and Exchange Commission, including the discussion of risk factors and historical results of operations and financial condition in those reports.
About Quest Diagnostics
Quest Diagnostics empowers people to take action to improve health outcomes. Derived from the world's largest database of clinical lab results, our diagnostic insights reveal new avenues to identify and treat disease, inspire healthy behaviors and improve health care management. Quest annually serves one in three adult Americans and half the physicians and hospitals in the United States, and our 45,000 employees understand that, in the right hands and with the right context, our diagnostic insights can inspire actions that transform lives. www.QuestDiagnostics.com.
The statements in this press release which are not historical facts may be forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date that they are made and which reflect management's current estimates, projections, expectations or beliefs and which involve risks and uncertainties that could cause actual results and outcomes to be materially different. Risks and uncertainties that may affect the future results of the company include, but are not limited to, adverse results from pending or future government investigations, lawsuits or private actions, the competitive environment, the complexity of billing, reimbursement and revenue recognition for clinical laboratory testing, changes in government regulations, changing relationships with customers, payers, suppliers or strategic partners and other factors discussed in the company's most recently filed Annual Report on Form 10-K and in any of the company's subsequently filed Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, including those discussed in the "Business," "Risk Factors," "Cautionary Factors that May Affect Future Results" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of those reports.
For further information: Denny Moynihan, Quest Diagnostics (Media): 973-520-2800, Shawn Bevec, Quest Diagnostics (Investors): 973-520-2900
This earnings release, including the attached financial tables, is available online in the Newsroom section at www.QuestDiagnostics.com.
ADDITIONAL TABLES FOLLOW
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Operations
For the Three and Twelve Months Ended December 31, 2018 and 2017
(in millions, except per share data)
| Three Months Ended December 31, | Twelve Months Ended December 31, | ||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Net revenues | $ | 1,839 | $ | 1,865 | $ | 7,531 | $ | 7,402 | |||||||
| Operating costs and expenses and other operating income: | |||||||||||||||
| Cost of services | 1,235 | 1,194 | 4,926 | 4,719 | |||||||||||
| Selling, general and administrative | 356 | 382 | 1,424 | 1,443 | |||||||||||
| Amortization of intangible assets | 24 | 20 | 90 | 74 | |||||||||||
| Loss on disposition of business | 4 | - | 4 | - | |||||||||||
| Other operating (income) expense, net | - | - | (14 | ) | 1 | ||||||||||
| Total operating costs and expenses, net | 1,619 | 1,596 | 6,430 | 6,237 | |||||||||||
| Operating income | 220 | 269 | 1,101 | 1,165 | |||||||||||
| Other (expense) income: | |||||||||||||||
| Interest expense, net | (43 | ) | (39 | ) | (167 | ) | (151 | ) | |||||||
| Other (expense) income, net | (10 | ) | 4 | (8 | ) | 16 | |||||||||
| Total non-operating expenses, net | (53 | ) | (35 | ) | (175 | ) | (135 | ) | |||||||
| Income before income taxes and equity in earnings of equity method investees | 167 | 234 | 926 | 1,030 | |||||||||||
| Income tax (expense) benefit | (40 | ) | 23 | (182 | ) | (241 | ) | ||||||||
| Equity in earnings of equity method investees, net of taxes | 12 | 10 | 44 | 35 | |||||||||||
| Net income | 139 | 267 | 788 | 824 | |||||||||||
| Less: Net income attributable to noncontrolling interests | 12 | 13 | 52 | 52 | |||||||||||
| Net income attributable to Quest Diagnostics | $ | 127 | $ | 254 | $ | 736 | $ | 772 | |||||||
| Earnings per share attributable to Quest Diagnostics' common stockholders: | |||||||||||||||
| Basic | $ | 0.93 | $ | 1.86 | $ | 5.39 | $ | 5.63 | |||||||
| Diluted | $ | 0.92 | $ | 1.82 | $ | 5.29 | $ | 5.50 | |||||||
| Weighted average common shares outstanding: | |||||||||||||||
| Basic | 136 | 136 | 136 | 137 | |||||||||||
| Diluted | 137 | 139 | 139 | 140 |
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Balance Sheets
December 31, 2018 and 2017
(in millions, except per share data)
| December 31, 2018 | December 31, 2017 | ||||||
| Assets | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 135 | $ | 137 | |||
| Accounts receivable, net | 1,012 | 924 | |||||
| Inventories | 99 | 95 | |||||
| Prepaid expenses and other current assets | 144 | 150 | |||||
| Total current assets | 1,390 | 1,306 | |||||
| Property, plant and equipment, net | 1,288 | 1,145 | |||||
| Goodwill | 6,563 | 6,335 | |||||
| Intangible assets, net | 1,207 | 1,119 | |||||
| Investment in equity method investees | 436 | 462 | |||||
| Other assets | 119 | 136 | |||||
| Total assets | $ | 11,003 | $ | 10,503 | |||
| Liabilities and Stockholders' Equity | |||||||
| Current liabilities: | |||||||
| Accounts payable and accrued expenses | $ | 1,021 | $ | 1,021 | |||
| Current portion of long-term debt | 464 | 36 | |||||
| Total current liabilities | 1,485 | 1,057 | |||||
| Long-term debt | 3,429 | 3,748 | |||||
| Other liabilities | 745 | 663 | |||||
| Redeemable noncontrolling interest | 77 | 80 | |||||
| Stockholders' equity: | |||||||
| Quest Diagnostics stockholders' equity: | |||||||
| Common stock, par value $0.01 per share; 600 shares authorized as of both December 31, 2018 and 2017; 217 and 216 shares issued as of December 31, 2018 and 2017, respectively | 2 | 2 | |||||
| Additional paid-in capital | 2,667 | 2,612 | |||||
| Retained earnings | 7,602 | 7,138 | |||||
| Accumulated other comprehensive loss | (59 | ) | (48 | ) | |||
| Treasury stock, at cost; 82 shares and 81 shares as of December 31, 2018 and 2017, respectively | (4,996 | ) | (4,783 | ) | |||
| Total Quest Diagnostics stockholders' equity | 5,216 | 4,921 | |||||
| Noncontrolling interests | 51 | 34 | |||||
| Total stockholders' equity | 5,267 | 4,955 | |||||
| Total liabilities and stockholders' equity | $ | 11,003 | $ | 10,503 |
Quest Diagnostics Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
For the Twelve Months Ended December 31, 2018 and 2017
| Twelve Months Ended December 31, | |||||||
| 2018 | 2017 | ||||||
| Cash flows from operating activities: | |||||||
| Net income | $ | 788 | $ | 824 | |||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
| Depreciation and amortization | 309 | 270 | |||||
| Provision for doubtful accounts | 6 | 8 | |||||
| Deferred income tax provision | 73 | 9 | |||||
| Stock-based compensation expense | 61 | 79 | |||||
| Loss on disposition of business | 4 | - | |||||
| Other, net | 8 | (6 | ) | ||||
| Changes in operating assets and liabilities: | |||||||
| Accounts receivable | (65 | ) | 9 | ||||
| Accounts payable and accrued expenses | (19 | ) | (8 | ) | |||
| Income taxes payable | 4 | 16 | |||||
| Other assets and liabilities, net | 31 | (26 | ) | ||||
| Net cash provided by operating activities | 1,200 | 1,175 | |||||
| Cash flows from investing activities: | |||||||
| Business acquisitions, net of cash acquired | (421 | ) | (581 | ) | |||
| Proceeds from disposition of business | 2 | 1 | |||||
| Capital expenditures | (383 | ) | (252 | ) | |||
| Decrease in investments and other assets | 1 | 2 | |||||
| Net cash used in investing activities | (801 | ) | (830 | ) | |||
| Cash flows from financing activities: | |||||||
| Proceeds from borrowings | 2,090 | 205 | |||||
| Repayments of debt | (1,966 | ) | (182 | ) | |||
| Purchases of treasury stock | (322 | ) | (465 | ) | |||
| Exercise of stock options | 99 | 130 | |||||
| Employee payroll tax withholdings on stock issued under stock-based compensation plans | (21 | ) | (23 | ) | |||
| Dividends paid | (266 | ) | (247 | ) | |||
| Distributions to noncontrolling interest partners | (54 | ) | (51 | ) | |||
| Contributions from noncontrolling interest partners | 16 | 4 | |||||
| Other financing activities, net | 23 | 37 | |||||
| Net cash used in financing activities | (401 | ) | (592 | ) | |||
| Net change in cash and cash equivalents and restricted cash | (2 | ) | (247 | ) | |||
| Cash and cash equivalents and restricted cash, beginning of period | 137 | 384 | |||||
| Cash and cash equivalents and restricted cash, end of period | $ | 135 | $ | 137 | |||
| Cash and cash equivalents | $ | 135 | $ | 137 | |||
| Restricted cash | - | - | |||||
| Cash and cash equivalents and restricted cash, end of period | $ | 135 | $ | 137 | |||
| Cash paid during the period for: | |||||||
| Interest | $ | 174 | $ | 159 | |||
| Income taxes | $ | 84 | $ | 243 |
Notes to Financial Tables
| Three Months Ended December 31, | Twelve Months Ended December 31, | ||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||
| (in millions, except per share data) | |||||||||||||||
| Amounts attributable to Quest Diagnostics' common stockholders: | |||||||||||||||
| Net income attributable to Quest Diagnostics | $ | 127 | $ | 254 | $ | 736 | $ | 772 | |||||||
| Less: Earnings allocated to participating securities | 1 | 1 | 3 | 3 | |||||||||||
| Earnings available to Quest Diagnostics' common stockholders - basic and diluted | $ | 126 | $ | 253 | $ | 733 | $ | 769 | |||||||
| Weighted average common shares outstanding - basic | 136 | 136 | 136 | 137 | |||||||||||
| Effect of dilutive securities: | |||||||||||||||
| Stock options and performance share units | 1 | 3 | 3 | 3 | |||||||||||
| Weighted average common shares outstanding - diluted | 137 | 139 | 139 | 140 | |||||||||||
| Earnings per share attributable to Quest Diagnostics' common stockholders: | |||||||||||||||
| Basic | $ | 0.93 | $ | 1.86 | $ | 5.39 | $ | 5.63 | |||||||
| Diluted | $ | 0.92 | $ | 1.82 | $ | 5.29 | $ | 5.50 |
| Three Months Ended December 31, | Twelve Months Ended December 31, | ||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||
| (dollars in millions, except per share data) | |||||||||||||||
| Adjusted operating income: | |||||||||||||||
| Operating income | $ | 220 | $ | 269 | $ | 1,101 | $ | 1,165 | |||||||
| Restructuring and integration charges (a) | 47 | 42 | 122 | 105 | |||||||||||
| Other (b) | 4 | 6 | 2 | 12 | |||||||||||
| Adjusted operating income | $ | 271 | $ | 317 | $ | 1,225 | $ | 1,282 |
| Adjusted operating income as a percentage of net revenues: | |||||||||||
| Operating income as a percentage of net revenues | 12.0 | % | 14.4 | % | 14.6 | % | 15.7 | % | |||
| Restructuring and integration charges (a) | 2.5 | 2.3 | 1.7 | 1.4 | |||||||
| Other (b) | 0.2 | 0.3 | - | 0.2 | |||||||
| Adjusted operating income as a percentage of net revenues | 14.7 | % | 17.0 | % | 16.3 | % | 17.3 | % |
| Adjusted net income: | |||||||||||||||
| Net income attributable to Quest Diagnostics | $ | 127 | $ | 254 | $ | 736 | $ | 772 | |||||||
| Restructuring and integration charges (a) | 47 | 42 | 122 | 106 | |||||||||||
| Other (b) | 4 | 6 | 2 | 10 | |||||||||||
| Income tax benefit associated with the special items (c) | (12 | ) | (16 | ) | (30 | ) | (42 | ) | |||||||
| ETB | (1 | ) | (1 | ) | (18 | ) | (37 | ) | |||||||
| Certain income tax items (d) | 1 | (106 | ) | (14 | ) | (106 | ) | ||||||||
| Adjusted net income | $ | 166 | $ | 179 | $ | 798 | $ | 703 |
| Adjusted diluted EPS excluding amortization expense: | |||||||||||||||
| Diluted earnings per common share | $ | 0.92 | $ | 1.82 | $ | 5.29 | $ | 5.50 | |||||||
| Restructuring and integration charges (a) (c) | 0.26 | 0.19 | 0.66 | 0.47 | |||||||||||
| Other (b) (c) | 0.02 | 0.05 | 0.01 | 0.07 | |||||||||||
| Amortization expense (e) | 0.16 | 0.11 | 0.57 | 0.40 | |||||||||||
| ETB | (0.01 | ) | (0.02 | ) | (0.13 | ) | (0.27 | ) | |||||||
| Certain income tax items (d) | 0.01 | (0.77 | ) | (0.09 | ) | (0.77 | ) | ||||||||
| Adjusted diluted EPS excluding amortization expense | $ | 1.36 | $ | 1.38 | $ | 6.31 | $ | 5.40 |
| Three Months Ended December 31, | Twelve Months Ended December 31, | ||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||
| (dollars in millions) | |||||||||||||||
| Cost of services | $ | 20 | $ | 14 | $ | 56 | $ | 45 | |||||||
| Selling, general and administrative | 27 | 28 | 65 | 60 | |||||||||||
| Other operating (income) expense, net | - | - | 1 | - | |||||||||||
| Operating income | $ | 47 | $ | 42 | $ | 122 | $ | 105 | |||||||
| Equity in earnings of equity method investees, net of taxes | $ | - | $ | - | $ | - | $ | 1 |
For the three months ended December 31, 2017, primarily represents non-cash asset impairment charges and incremental costs incurred as a result of hurricanes. For the twelve months ended December 31, 2017, primarily represents non-cash asset impairment charges associated with an investment, non-cash asset impairment charges and incremental costs incurred as a result of hurricanes and costs incurred related to certain legal matters, partially offset by a gain on the sale of an interest in an equity method investment.
The following table summarizes the pre-tax impact of these other items on the company's consolidated statement of operations:
| Three Months Ended December 31, | Twelve Months Ended December 31, | ||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||
| (dollars in millions) | |||||||||||||||
| Cost of services | $ | - | $ | 2 | $ | 12 | $ | 5 | |||||||
| Selling, general and administrative | - | 4 | - | 7 | |||||||||||
| Other operating (income) expense, net | 4 | - | (10 | ) | - | ||||||||||
| Operating income | $ | 4 | $ | 6 | $ | 2 | $ | 12 | |||||||
| Other non-operating expense (income), net | $ | - | $ | - | $ | - | $ | (2 | ) |
| Three Months Ended December 31, | Twelve Months Ended December 31, | ||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||
| (dollars in millions) | |||||||||||||||
| Restructuring and integration charges | $ | (12 | ) | $ | (16 | ) | $ | (31 | ) | $ | (41 | ) | |||
| Other | - | - | 1 | (1 | ) | ||||||||||
| $ | (12 | ) | $ | (16 | ) | $ | (30 | ) | $ | (42 | ) |
certain expenses on its 2017 tax return at the federal corporate statutory tax rate in effect during 2017 partially offset by an income tax expense associated with finalizing the impact of the enactment of TCJA.
For the three and twelve months ended December 31, 2017, represents the net estimated tax benefit associated with the TCJA. The company recorded an estimated net income tax benefit of $106 million in 2017 associated with the TCJA, including a deferred income tax benefit of $115 million primarily due to the remeasurement of net deferred tax liabilities and reserves at the new combined federal and state tax rate, partially offset by $9 million of current tax expense primarily due to the mandatory repatriation toll charge on undistributed foreign earnings and profits.
| Three Months Ended December 31, | Twelve Months Ended December 31, | ||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||
| (dollars in millions) | |||||||||||||||
| Amortization of intangible assets | $ | 24 | $ | 20 | $ | 90 | $ | 74 | |||||||
| Equity in earnings of equity method investees, net of taxes | 4 | 4 | 17 | 16 | |||||||||||
| $ | 28 | $ | 24 | $ | 107 | $ | 90 |
| Diluted earnings per common share | $ | 5.16 | |
| Restructuring and integration charges (a) | 0.67 | ||
| Amortization expense (b) | 0.61 | ||
| ETB | (0.04 | ) | |
| Adjusted diluted EPS excluding amortization expense | $ | 6.40 |
| Amortization of intangible assets | $ | 99 | ||
| Amortization expense included in equity in earnings of equity method investees, net of taxes | 15 | |||
| Total pre-tax amortization expense | $ | 114 | ||
| Total amortization expense, net of an estimated tax benefit | $ | 85 |
| 2019 Revenue outlook: | Low | High | |||||||||||
| 2018 Revenue | $ | 7,531 | $ | 7,531 | |||||||||
| 2019 Revenue growth | 1 | % | 3 | % | |||||||||
| 2019 Revenue outlook | $ | 7,600 | $ | 7,750 |